Step out of the shadow

We believe there is a long shadow of the 2008 Global Financial Crisis (GFC) that still prejudices investor sentiment to risk and return within corporate bond markets.

Recently we were asked about default rates in investment grade credit, and what impact this had on our positive view of the asset class.

We answered that over time investment grade spreads more than compensate for the risks of generic ownership of investment grade bonds. To support our view we borrowed some long-term evidence from the 2016 S&P ratings analysis around defaults, covering the period from 1981 to 2016.

According to the study, the Lehman default was twice the size of the next largest defaulter – Ford Motor Co., in 2009 – which in turn was almost twice the size of Energy Future Holdings at $47bn in 2010. In each year prior to 2008 (excluding WorldCom in 2002), the total default amount was less than $10bn.

Yet the lingering concern for credit markets continues to be the revisiting of the scale and size of defaults in the GFC – and the knock-on contagion that curtails access to credit. Our brighter view is that there continues to be ready access to credit for investment grade issuers and that the outlook continues to be for solid, sustainable growth – which doesn’t have the same cyclicality as we have seen over the past 40 years (the period of the S&P study).

We would note that the 2008 GFC was the first systemic crisis within the S&P study period, while the next crisis is likely to take a very different format to that of 2008, not least due to the regulatory and macro prudential steps taken by authorities since 2009.

In the last five years, 99.7% of BBB issuers have not defaulted. In terms of the triple digit basis point spreads available in investment grade markets over that period (and today), the defaults have been almost de minimis. So we continue to believe that the ongoing benign economic outlook combined with active management can ensure good levels of capital preservation in well-constructed corporate bond funds.

Important information

For Professional Investors only and not to be distributed to or relied upon by retail clients.

The opinions presented are those of Kames Capital fund managers as at the time of publishing and may change as subsequent conditions vary. They are not intended to be relied upon as a forecast, research or investment advice, and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Companies mentioned may not necessarily be held in any of Kames Capital funds. The information and opinions contained in these pieces are derived from proprietary and non proprietary sources deemed by Kames Capital to be reliable, are not necessarily all inclusive and are not guaranteed as to accuracy. Reliance upon information in this material is at the sole discretion of the listener/viewer.

This site is not intended for use by any US persons (being residents of the United States of America or partnerships or corporations organised under the laws of the United States of America or any state, territory or possession thereof), who are excluded from the content in this site.

For Professional Investors only and not to be distributed to or relied upon by retail clients.

The opinions presented are those of Kames Capital fund managers as at the time of publishing and may change as subsequent conditions vary. They are not intended to be relied upon as a forecast, research or investment advice, and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Companies mentioned may not necessarily be held in any of Kames Capital funds. The information and opinions contained in these pieces are derived from proprietary and non proprietary sources deemed by Kames Capital to be reliable, are not necessarily all inclusive and are not guaranteed as to accuracy. Reliance upon information in this material is at the sole discretion of the listener/viewer.

This site is not intended for use by any US persons (being residents of the United States of America or partnerships or corporations organised under the laws of the United States of America or any state, territory or possession thereof), who are excluded from the content in this site.